Barron's coverage of the World Economic Forum and implications for investors

Search Davos Report2

January 21, 2015, 4:37 P.M. ET

DAVOS: A.P. Moller-Maersk Can Navigate Its Way Through Oil Mess

By Jonathan Buck

Denmark’s A.P. Moller-Maersk can weather choppy oil markets and generate strong returns for shareholders.
Its shares (ticker: Maersk-B.Denmark) can surge about 20% in value in the next 12 months. That isn’t too ambitious, and would only return to stock to its highs of the past 52 weeks.
The Copenhagen-based company’s oil business has taken a big hit from the steep slide in oil prices, but its conglomerate structure can help it to mitigate the impact. A.P. Moller-Maersk also has a track record of restructuring its businesses for the better during periods of upheaval. This time may be no different.
Its valuation is undemanding. A.P. Moller-Maersk’s shares trade at 9.4 times projected earnings for 2015, which is below their five-year average of 10.7 times. In Copenhagen Wednesday afternoon, the stock was trading at 12,890 Danish crowns ($2,014).
Analysts are upbeat on A.P. Moller-Maersk’s prospects. A consensus price target of 15,344.62 Danish crowns suggests upside of about 20%.
Its unsponsored American depository receipts, which trade in New York under the ticker AMKBY, traded Tuesday morning at $10.10, giving the company a market capitalization of more than $43.54 billion.
A.P. Moller-Maersk is a conglomerate with five core businesses: container shipping company Maersk Line; port operator APM Terminals; APM shipping services; oil producer Maersk Oil; and Maersk Drilling, which provides drilling services to the oil industry.
Maersk Oil produces 557,000 barrels of oil equivalent each day from fields in Denmark, the United Kingdom, Qatar, Kazakhstan, Brazil and Algeria, and accounts for about 20% of group revenues.
The effect of the sharp fall in oil prices has been painful, says A.P. Moller-Maersk Chief Executive Nils Smedegaard Andersen in an interview on the sidelines of the World Economic Forum’s annual meeting in Davos. A $10 drop in the price of a barrel of oil costs Maersk Oil $250 million, he adds.
“It is a massive impact,” Andersen says. “The way we are trying to compensate for that is we are reducing costs, we are reducing exploration efforts, and concentrating on developing the resources we have already found insofar as it can be done on the basis of a reasonable oil price.”
A.P. Moller-Maersk had expected a drop in oil prices to $70 to $80 a barrel, but it hadn’t anticipated the decline to recent lows under $50.
“We know what we will lose on the oil and oil services side, but there is some upside coming our way as a conglomerate, in the trading area, because lower oil price should mean more trade and a lower oil price should mean less cost.”
More than 55% of the company’s revenues come from its container-shipping business. Maersk Line operates 580 vessels with a capacity of 2.8 million twenty-foot equivalent units, or TEUs, the standard container size. It is the world’s largest container-shipping company and reported profits of $1.51 billion in 2013 on revenues of $26.20 billion.
Amid the oil turmoil, Andersen also sees opportunities.
“Because of the hedge between transportation and oil, we have some flexibility to take advantage of it, and maybe also, looking forward, this could be an opportunity for us to get some resources less expensively than going out and doing expensive exploration,” he says.
A.P. Moller-Maersk has changed course in recent years. Management has slowed acquisitions and disposed of noncore businesses to unlock value. Last summer it announced a $1 billion share buyback.
Andersen is focused on delivering for shareholders. “We are looking at the capital structure and trying to ensure that we are an attractive company (for investors) to be invested in.”
The company is forecast to earn profits of $4.54 billion on revenues of $47.60 billion in 2014, rising to $5.01 billion on revenues of $48.11 billion in 2015.
It could pay to ride out this storm.

About Davos Report

The World Economic Forum’s annual meeting in Davos, Switzerland, attracts 1,500 corporate leaders. On the sidelines of the meeting, we talk to executives to learn about business trends and strategic developments.

The blog is written by Barron’s Europe Editor Jonathan Buck, who previously worked for The Wall Street Journal and its international editions. He has attended the World Economic Forum’s annual meeting each year since 2011.